Author Topic: Why were Mortgage rates so high in the 70's and 80's?  (Read 6361 times)

andysandp

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Why were Mortgage rates so high in the 70's and 80's?
« on: January 21, 2017, 09:50:38 AM »
I was looking at historical Mortgage Rates in the 70's and 80's.  They were over 7% in the 70's, and up to 18% in 1981!

At those rates, could the Rents cover the mortgage/expenses and still give you cash flow?

Or were Investors just speculating on the appreciation?

It seems so weird to me that people would invest with such a high mortgage rate.

« Last Edit: January 21, 2017, 10:20:16 AM by andysandp »

Thinkum

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #1 on: January 21, 2017, 10:51:45 AM »
It's called inflation. It was insanely high. Rates for mortgages AND savings accounts were crazy high compared to today. Older coworkers told me that is was a great time to save money, but horrible time to be in debt. One person told me they remember getting double digit wage increases. I cannot even fathom.

andysandp

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #2 on: January 21, 2017, 11:05:55 AM »
So were Investors getting really high rents at that time that covered much more then their Mortgage and Expenses? 

I thought your not supposed to assume more then 3% (inflation)for sales and rental prices each year. 

Did the rents increase by 10-18% each year at that time as well?
« Last Edit: January 21, 2017, 11:09:43 AM by andysandp »

CCCA

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #3 on: January 21, 2017, 01:05:38 PM »
Seems like rents would increase faster than today. Coupled with fixed mortgage costs, over time the rents would grow much faster than expenses.

maizeman

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #4 on: January 21, 2017, 01:21:07 PM »
Remember that high interest rates mean low housing prices because the maximum amount a family can afford to pay for their mortgage each month is the same whether the interest rates are 2% or 20%.

At 2%, a family that can afford $1,000/month for their mortgage payment can pay up to $270,000 for their house. At 20% interest, the same family can only spend $60,000 on a house. Because the value of a house is worth what purchasers are willing and able to pay, in a perfect economy, the same house that is worth $270k in a 2% interest rate environment is worth only $60k in a 20% interest rate environment. The reality is a big messier than that, but the early 1980s was still an excellent time to buy a house cheap if you had cash.

SeattleCPA

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #5 on: January 22, 2017, 08:32:25 AM »
So were Investors getting really high rents at that time that covered much more then their Mortgage and Expenses? 

I thought your not supposed to assume more then 3% (inflation)for sales and rental prices each year. 

Did the rents increase by 10-18% each year at that time as well?

No, they didn't.

Basically what happened is that you didn't borrow money unless you were disparate. (I remember borrowing a few thousand at 18%-ish so I could finish my MBA.)

The high interest rates nearly killed real estate development and construction. And home buyers were terribly squeezed trying to make payments on 14% mortgages.

I was working in commercial real estate a few years later with the developer who built the original Microsoft corporate campus in early 80s and he told me he was borrowing at 21%.

Another Reader

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #6 on: January 22, 2017, 09:24:18 AM »
So were Investors getting really high rents at that time that covered much more then their Mortgage and Expenses? 

I thought your not supposed to assume more then 3% (inflation)for sales and rental prices each year. 

Did the rents increase by 10-18% each year at that time as well?

No, they didn't.

Basically what happened is that you didn't borrow money unless you were disparate. (I remember borrowing a few thousand at 18%-ish so I could finish my MBA.)

The high interest rates nearly killed real estate development and construction. And home buyers were terribly squeezed trying to make payments on 14% mortgages.

I was working in commercial real estate a few years later with the developer who built the original Microsoft corporate campus in early 80s and he told me he was borrowing at 21%.

You borrowed from the seller because they needed to get the home sold.  If they had a low rate mortgage, they would "wrap" the first mortgage with a higher rate second and you would assume the first mortgage.  You would buy the house "subject to" assuming the first mortgage.  Lenders later decided they did not like this and started initiating foreclosures for violation of loan terms.  Eventually, new mortgages became non-assumable.

In that period, employees had more leverage, and wages rose to keep up with inflation.  With nothing to cap consumption, the spiral in wages and prices continued for quite awhile.

LiveLean

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #7 on: January 22, 2017, 07:10:33 PM »
We had to move 100 miles late in 1980 when my dad got a new job.

Parents were very Mustachian. Had no mortgage on the house they sold. But since we were moving to higher COL area, they were looking at a much bigger purchase even on a comparable home. Dad found a larger, beautiful home from a bankrupt builder who would accept any offer -- and did. But it required that my folks take out a $100K mortgage and rates were 18 percent. Mom was mortified, absolutely refused to have debt. Dad negotiated with his new employer to give him a $100K loan at 7 percent. Mom insisted he pay it off in three years and he did. Good thing, too, since in three years he left that employer (but stayed in the area).

Then, as now, such a situation would be highly unusual on so many levels.

Drifterrider

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Re: Why were Mortgage rates so high in the 70's and 80's?
« Reply #8 on: January 23, 2017, 12:16:47 PM »
I was getting 12.99% on a CD in 1982.  A "good" rate for a new car in 1985 was anything under 12%.  I worked in Title insurance in the mid-80s.  I saw 18% mortgages with six points.